By Eric Halsey
It’s a simple reality in today’s business world: If you aren’t embracing all of the alternative finance tools at your disposal, you risk losing out to the competition. The mentality of small business owners who are reluctant to rework their finances to incorporate new tools is all too common – and simply outdated.
Don’t ignore new financial tools like invoice discounting and P2P lending because of factors like the size of your business or the intensity of your competition; these tools can revolutionize your business. Studying questions like what is a surety bond in depth can also help you add liquidity and flexibility to your account sheets.
Here are some of the best tools available to improve your small business finances today.
Building Efficiency into Your Supply Chain
With global supply chains growing longer, sourcing products and materials is becoming cheaper, yet more complex – even for small businesses. This is the central paradox, because each additional link in the chain creates additional places where things can go wrong, leading to potentially costly delays.
While it seems unlikely that the length of those supply chains will decrease any time soon, there are things you can do to reduce the inherent risks of long supply chains. Using either factoring or invoice discounting will cut the time required to receive payments, giving you the financial flexibility to react quickly if you face a liquidity crunch resulting from supply chain problems.
How Does It Work?
When you have accounts receivable, a factoring or invoice discounting company will purchase the debts in exchange for a percentage (10-30 percent is typical) of the outstanding invoices. In the case of factoring, the company now assumes the responsibility for collecting payments, whereas with invoice discounting, you’ll still collect them yourself.
What’s important is that in either case, 30-90 days of waiting for an invoice to be paid can be transformed into 1-2 days. This is the kind of flexibility you need to overcome the challenges of a long supply chain. Alternatively, it can simply be a way to speed up your business cycle or get you through a difficult financial period.
Beyond these ways to boost your finances in your accounting practices, new alternative lending options also offer ways to finance all other aspects of your small business.
P2P Lending for Agile Finances
P2P loans return to the central issue of liquidity. Being faster and easier to obtain than traditional bank loans, they offer short-term cash with shorter payback periods. If you’re looking for larger, long-term financing, they may not be your best option, but for quick, agile cash injections, they far outperform bank loans.
These options are particularly valuable if your small business is in a sector that is underserved by traditional lending institutions. The investors who put up the capital for P2P loans are generally more open to creating new lending relationships than many banks.
The Secret to Small Business Health: Liquidity
In many ways, these tools come down to liquidity. A lack of liquidity is a business killer. It’s essential for small businesses to constantly keep their eyes open for opportunities to boost their liquidity and become more agile in their marketplace.
Often, these opportunities are right under your nose. Surety bonds are one example. Too many small business owners believe that posting cash is the simplest way to fulfill licensing or other bonding obligations. However, working with a bonding company allows you to post just a small percentage of the legally required amount.
By spending less on bonds, you’re freeing up funds to reinvest in your small business. This is what makes these improvements exponential factors in changing your finances. The ripple effects are enormous when you properly utilize alternative finance tools to grow your business.
How has your small business used alternative financing to changing its accounting practices and improve liquidity? Let us know about your experiences in the comments.
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Eric Halsey is a historian by training who’s been interested in U.S. small businesses since working at the House Committee on Small Business in 2006. Coming from a family with a history of working on industry policy, he has a particular interest in the surety bonding and alternative finance industries. He shares his knowledge for JW Surety Bonds.
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